Top Signs of a Ponzi Scheme and How to Respond

A Ponzi Scheme is a type of investment fraud that pays purported “returns” to current investors from proceeds received from new investors, rather than through genuine investments. Once the fraudster stops receiving new money or investors request too much of their money back, the Ponzi Scheme falls apart. The term for Ponzi Scheme is from a famous 1920s con man, Charles Ponzi who redistributed investor funds for international reply coupons to himself and other investors. More recently, thousands of investors, many of whom were elderly lost their money in a billion-dollar Ponzi Scheme perpetrated by the Robert Shapiro Woodbridge Group. Not all Ponzi Schemes are as large and notorious as that committed by Bernie Madoff. Many more Ponzi Schemes happen on a much smaller basis and go undetected.

Malecki Law has handled numerous Ponzi cases: McGinn Smith, Robert Van Zandt, Hector May, Illume, and Steven Pagartanis, just to name a few. We are available to review your situation at no cost. Catching these things early inures to your benefit. Investors can fight to recoup their losses from a Ponzi Scheme committed under a FINRA registered firm through arbitration.

Our securities fraud law team aims to equip investors with the knowledge to spot not only Ponzi Schemes but other fraudulent investment opportunities as well. Everyone should be aware of the following signs that could indicate a Ponzi Scheme.

Guaranteed high returns with little or no risk – This the most glaringly obvious sign of a Ponzi Scheme because all investments carry a degree of risk. Common financial knowledge is that the higher the potential reward, the greater the accompanying risk. Furthermore, no one has any right to make guarantees when it comes to investments, given the possible market fluctuations. If there were such an investment product that could guarantee no risk and significantly high return, the entire world would want a piece.

Overly consistent returns – Investments that purportedly produce positive returns at all times should certainly ring an alarm. Given the fluctuating market, most investments will not consistently generate positive returns at all times. The purported consistent “returns” that you appear to be receiving from your investment is from another source. The Ponzi Schemer is most likely using money from other investors to pay you these falsified “returns”.

Unregistered investments – Investments not registered with the SEC or state regulators are more prone to fraudulent activity. Additionally, such investments do not include pertinent information about the company that gets disclosed through registration. Therefore, investors will not have the opportunity to fully understand their investment with knowledge of the company’s operations and finances.

Free meals and High-Pressure Sales – The saying that there is no such thing as a free meal certainly holds in the securities industry. Investment salespeople will sometimes hold “free lunch” seminars to wine and dine potential investors. Ponzi Scheme perpetrators often use “free meals” and other seemingly educational conferences to just pressure investors into making blind, uninformed investments. If it were a legitimate investment opportunity, the salesperson would not try to take your money on the spot. Please do not allow yourself to be convinced on the spot to invest in their product without doing your research.

Hidden, complex information – Ponzi scheme fraudsters will go above and beyond to keep potential investor victims in the dark. The purported investment would often be seemingly complex illiquid products, like promissory notes and hedge funds. When asked about the specifics of the product, these financial scam artists will sometimes either write the investment off as beyond your scope of understanding or make-up a convoluted explanation. Be sure that information about your investment is hugely transparent from broker explanations and detailed statements. There is no justification for the specifics of a product to be secretive or not explained to you in simple terms.

Questionable paperwork – A lack of any paperwork should be a massive warning of illegitimacy. Investors should always have access to documents that reflect the status and details of their investments. However, the existence of paperwork does not necessarily speak to their credibility. Ponzi schemers will falsify documents to back up their lies. Check for inconsistencies in the information, misspellings, grammatical errors, and inconsistent deliveries. Sometimes, these fraudulent brokers and salespersons will make mistakes. Malecki Law has seen official-looking statements purporting to be from a major firm copied using Adobe Acrobat, but with no account numbers. Our securities lawyers have seen “tax-free” corporate bonds (an investment that simply cannot exist under the tax code) and worthless guarantees or fake security interests in property, to name a few examples.

Shady, unlicensed sellers – First of all, investors need to make sure that any potential brokers or financial advisors are registered licensed professionals and thus held accountable to industry rules. Working with a FINRA-registered professional comes with easy access to their disciplinary records and other relevant disclosures. Before engaging with a seller, look up their name for free on BrokerCheck or investors.gov for access to their records and employment history. At the very least, please do a Google search for any criminal records.

No More Returns or Access to Funds – There comes a time in every Ponzi Scheme when an investor will stop receiving returns and not be able to withdraw money from their account. The reason for this is that the Ponzi scheme perpetrator no longer gets the new money to sustain this fraudulent cycle. At this point, the Ponzi Schemer will desperately make up lies to account for the investments’ decline and fund illiquidity to maintain normalcy. Once the funds deplete, the Ponzi Scheme will eventually finally reach its demise, and investors realize their losses.

Even with careful choices, the savviest of investors can fall victim to the all convincing sales pitch of an often-charismatic Ponzi Scheme perpetrator. If you notice any of these signs, investigate and seek legal assistance before the scheme even falls apart. Anyone with reason to believe that their investments were lost through a Ponzi Scheme should immediately contact our investment fraud lawyers for legal assistance.